Five things to consider when hiring an auction company.
1. Estimating Your Assets Value
Typically, one of the first questions a business owner will ask me is, “how much will the assets bring at auction”. The potential is there for an auctioneer to give an inflated value in an attempt to get the deal. After taking the time to review the assets, the auctioneer should provide the client a conservative estimate of the sale based upon his experience and the current market trends. It is important that the auction company provide realistic expectations for the auction so the seller can make informed decisions based on their best interest.
Is the auction company working for you or against you? The agreement you sign may determine this.
A business owner should carefully consider how the auction company is to be compensated. There are many ways auctioneers are paid. Examples include: straight commission, outright purchase of assets, guaranteed base with a split above to both auctioneer and seller, guaranteed base with anything above going to auctioneer or a flat fee structure.
In an outright purchase agreement, the auctioneer simply becomes your end buyer. The auction company purchases your assets and relocates them. While this can be an option in some unique situations, keep in mind that the auction company will want to purchase your assets at a very reduced price in order to make a profit at a later date.
In a minimum base guarantee, the auction company guarantees the seller that the auction will generate a minimum amount of sales. Anything above that amount either goes to the auction company or split with the seller. While a seller might feel more comfortable doing an auction knowing that he is guaranteed a minimum amount for his sale, keep in mind that it is the best interest of the auction company to secure a minimum base price as low as possible in order reduce their financial liability to the seller and secure higher compensation for the sale.
In a flat fee structure, the auctioneer agrees to show up for the sale and call the auction. There is no incentive for the auctioneer to get the best prices for your assets. The auction company is compensated regardless of the outcome of your sale.
What is the best option for business owners? In my experience, an agreed upon straight commission structure. This puts the responsibility on the auction company to provide the best outcome for everyone involved. There is an incentive for the auction company to work hard for both parties, set up and run a professional sale, obtain the highest bid and sell every item on the inventory. Successful auctions translate to a higher bottom line for both the seller and the auction company.
3. Auction Expenses
In most auction agreements the expenses to conduct an auction are passed onto the seller. If the auction company pays for the expenses, it is simply absorbed in higher commission rates.
All expenses should be agreed upon in advance in a written contract. Typical expenses will include the costs of advertising, labor, legal fees, travel, equipment rentals, security, postage and printing. A reputable auction company will be able to estimate all expenses based upon their experience in previous auctions. An agreement should be actual costs charged as expenses, not an estimated amount.
Advertising is typically the highest expense in conducting an auction. The auction company needs to set up an advertising campaign that will promote the sale to its best advantage and not overspend to simply advertise the auction company.
Once the auction is complete, the auction company should provide a complete breakdown of all expenses to the seller, including copies of receipts within the final auction summary report.
4. Buyer’s Premium
What is a buyer’s premium? If you attend auctions regularly, you are very familiar with this term. The auction company charges a fee to the buyer when they purchase an item at auction.
The buyer’s premium has been around since the 1980’s and is a standard auction practice. It was first used by auction houses to help offset costs of running brick and mortar permanent auction facilities. Since then, it has spread to all aspects of the auction industry. It is prominent in online auctions and allows auction companies to cover additional expenses incurred from online sales.
It is the responsibility of the auction company to provide clear disclosure of the buyer’s premium to both the buyers and the sellers. Those not familiar with auctions are often taken back by the buyer’s premium. They looked upon it as an under handed way for the auction company to make more money. Reputable auction companies will provide full disclosure within the auction contract, advertisement and bidder registration.
Typically, an auction company will charge online buyers a higher buyer’s premium percentage than those attending an auction in person. Extra fees are incurred with online bidding and are charged accordingly to online buyers. This provides the seller a level playing field for both online buyers and those attending the auction in person. Without the buyer’s premium, there is no way to accomplish this.
We’ve all been there. We’re looking forward to attending an auction only to find that the items were sold prior to the auction date.
As an auctioneer with over thirty-six years of experience, I can honestly state that pre-sales will hurt an auction. When a company decides to liquidate their assets, it is easy to sell off high end pieces of equipment through online sources, equipment vendors or to other businesses. The seller receives instant cash and avoids paying a commission to an auction company.
Auctioneers find themselves appearing to act in a self-serving capacity when potential clients say they are planning to sell off parts of their inventory prior to an auction. It’s hard not to consider the auctioneers commission when they warn you not to pre-sell anything. Yes, the auctioneer wants to earn a commission on those sales but it is more important that the auctioneer protect the sale from potential negative backlash that comes from pre-selling. The buying public knows when an auction has been “cherry picked” prior to the sale and it reflects in their bidding. It becomes an auction of “leftovers” and that impacts prices.
A buyer who purchases prior to the auction usually does not attend the sale. They already bought equipment at a good price with no competition. When they do come to the auction, they tend to let others know of their great pre-sale purchases which again, impacts prices and the overall excitement of the sale.
It is important to understand that auctions work best with a complete inventory. You want competition on your higher end equipment. The easy to sell items make it possible to gain respectable prices for hard to sell items.
The question of ethics comes up constantly in the auction industry. Auctioneers, in general, have a reputation similar to used car salesmen. Several years ago I was in a meeting proposing a bid on a large metal fabrication facility in Sacramento, California. The owner was retiring and closing his business. He stated very firmly that he thought auctioneers were crooked. We asked him if there were unethical people in the sheet metal business? His answer was “yes” but added that he ran an honest business. We responded, “so do we”.
If you are in need of auction services, please call us for a free consultation.
Photo credit: Bryan Clar